Viewpoints

The iPhone Upgrade Program – Carriers Beware!

Sep 21, 2015

On 9/9/2015, Apple announced its latest devices in San Francisco. While much of the analyst commentary has been focused on new device features and functionality, I would like to discuss a small footnote of the announcement that is likely to send shockwaves among the US network operators.

In its 265 retail stores, Apple will allow customers to pick their service provider and purchase an unlocked iPhone 6s or iPhone 6s Plus for equal monthly installments of $32 and $37 respectively over 24 months. This includes Apple Care for these devices. This offer is new and relatively untested in the market. Typically, device manufacturers rely on their carrier partners to sell devices (either for full payment, installments or with subsidies). While Apple has what its competitors strive for, which is retail presence, the company has typically stayed away from offering unlocked phones and installment plans in the past. This is likely to have a major impact on carriers during the 2015 holiday period and beyond.

While details about this plan are slim, the shockwaves have already been felt by carriers. While it is premature to tout the success (or failure) of this approach, one thing is clear: This puts the carriers at the mercy of Apple and its customers. Apple customers can now work directly with Apple to purchase devices and tag on the plan based on the coverage and price they desire.

Why should Carriers beware?

The biggest concern to carriers is the user experience. A typical experience for customers at a carrier involves a lot of waiting and evaluating other manufacturers’ devices. At the Apple retail store, customers get to play with different Apple products and a completely different experience that may lead to them purchasing multiple Apple products.

Another concern is cost. The cost of Apple installment plans is similar to what AT&T, Verizon and T-Mobile offer without device protection. AppleCare is the added layer of protection that is much more inexpensive than what the carriers offer. Carriers offer various levels of protection for between $6.99 to $9.99 a month. That equates to between $84 and $120 a year (numbers rounded off). AppleCare is available for an additional $5 and $6 for the iPhone 6s and iPhone 6s Plus respectively. This equates to between $60 and $72 a year per device at the Apple store. In addition, customers can purchase a new Apple device each year.

Finally, if Apple allows customers to change carriers without penalty (if, for example, they are dissatisfied with their service), this would have a major impact on carriers. Typically, customers have to pay off the device to cancel service. This is true for Verizon, AT&T and T-Mobile. However, if the devices are directly tied to Apple and not the carrier, customers may have the option of changing carriers without owing anything since they will continue to use the same Apple device. In the short term, this may not have much of an impact. However, in the long term, the impact could be felt in churn rates for the carriers.

The Last Word

With this announcement, Apple has taken a major step in eliminating the dependence of customers purchasing devices and plans from carriers. How the carriers react to this announcement is yet to be seen. For T-Mobile, this announcement from Apple fits well into the narrative that they have promoted for the past 2 years. Companies like AT&T and Verizon may be forced to slash prices to match T-Mobile’s offerings to compete in the Apple store.

While Apple is likely to see major success with this strategy, I cannot imagine the other device manufacturers using the same strategy. Unfortunately, other carriers do not have the luxury of branded retail stores to push out their products. They are still dependent on the carriers and large retailers to get their products in front of the consumer. All of this makes it an interesting holiday season for mobile device shoppers and the carriers.

Chart 1: iPhone 6s and iPhone 6s Plus Pricing from Apple and Major U.S. Carriers

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